Tag: Henry George

“The earth is the tomb of dead empires, no less than of dead men.” Thus wrote the American economist and journalist Henry George in his 1879 worldwide bestseller, Progress and Poverty. Adam Smith had identified cooperation and specialization—“the division of labor”—as the forces that generated economic growth and prosperity. George claimed that those same forces led eventually to collapse, as monopolization of land and other natural resources directed more and more wealth into ever fewer hands. (George was nonetheless an optimist; he argued for heavy taxes on wealth and checks on monopoly—causes vigorously taken up by Progressive reformers in the early twentieth century.)

When George first wrote, the sun never set on Queen Victoria’s Empire, and looked like it never would. Yet twenty years later the British Empire was visibly faltering, plagued by bankruptcies of investments in U.S. railroads, the failure of obsolete industries, and the quagmire Boer War in South Africa. New rivals—the United States, Germany, and Russia—peered over the horizon.

In The Geopolitics of American Global Decline: Washington Versus China in the Twenty-First Century, McCoy describes the Chinese strategy to break through the encircling ring of American bases to reach—and control—its markets and resources directly. As U.S. officialdom has already noted with some alarm, China is aggressively seeking to assert dominion over the South China Sea between it and Japan and the Philippines. It has been dredging landfill to create airbases on the unoccupied Spratley Islands, and has demanded that U.S. and other aircraft overflying the area obtain Chinese permission. But that’s just the eastern end. McCoy presents maps showing China’s massive investments in infrastructure to link it westward overland to the rest of the great Eurasian heartland. While U.S. railroads and bridges crumble, the Chinese are building a dense internal network of sophisticated high-speed high-volume railroads, plus oil and gas pipelines. These will connect up with transcontinental railways and pipelines, crossing Kazakhstan, reaching Moscow, and from there to Hamburg, Germany on the Baltic Sea. Another corridor will connect through Pakistan to the Arabian Sea, and yet another across Myanmar to the Indian Ocean. Meanwhile, the Chinese are making huge collaborative investments with these neighbors and with willing partners in Africa and Latin America. McCoy sees the TPP as Obama’s last-ditch effort to contain China.

For years, Barry Lynn has reported on the growing power—and weakness—of multinational monopolies. The power is more obvious: higher prices, less choice, less innovation—and greater political influence. The weakness is less obvious: less investment, fewer jobs, lower wages, and restriction of manufacturing to dependence on a small number of cheap, mostly foreign suppliers.

Here’s where China comes in, as Lynn reports in The New China Syndrome: American business meets its new master. Multinational businesses, like the auto companies and computer companies, increasingly depend on China both for cheap manufacturing and for access to the growing Chinese consumer market. Lynn reports a number of instances where Chinese have intimidated multinationals into concessions on price, or ownership shares, or jobs for children of Chinese leaders. He describes an episode in which bureaucrats summoned in-house lawyers from some thirty companies, including GE, IBM, Intel, Microsoft, Siemens, and Samsung, told them that half the companies were under investigation for monopoly crimes—without saying which—and instructed them write public “self-criticisms” under threat of double or triple fines should they refuse. The great monopolies must submit to this arbitrary tyranny precisely because they have destroyed so many other sources of supply, and have so eroded consumer markets in the rest of the world.

Bill Clinton saw U.S. investment in China as a way to “a more open and free China.” What if, Lynn asks, “the extreme economic interdependence between the United States and China is not actually carrying our values into a backward and benighted realm, but accomplishing precisely the opposite — granting the Chinese Politburo ever-increasing leverage over America’s economic and political life?” And, one might add, leverage over all the other multinational host countries? That could hardly have been more obvious than in the obsequious reception given to President Xi Jinping on his recent state visit to Great Britain. The meeting sealed a series of business investments, including a deal in which Chinese investors take a one-third stake in Hinkley Point C, Great Britain’s first new nuclear plant in a generation.

So, on the one hand, as Alfred McCoy suggests, Chinese infrastructure investment and joint ventures in foreign countries increasingly constrain U.S. power from the outside. On the other, as Barry Lynn suggests, Chinese control of multinational corporations threatens U.S. power from the inside. After the British Empire collapsed in the bloodbath of World War I, it staggered on a few more years as a zombie agent of the growing American empire. (See Middle East.) That empire may in turn stagger on as the zombie agent, not of a western democracy, but of a giant nation contemptuous of our values—and with thousands of years’ experience managing empires.

Part II: The Neoclassical Response to the Classical Theories of Inequality and Growth

Mason Gaffney has shown how many individuals helped construct neoclassical economics, often with financial support from the robber barons and their successors. I will focus on two: in the United States, John Bates Clark (1847-1938), and in Europe, Vilfredo Pareto (1848 to 1923).

Recall from Part I that the classical economists divided society into three classes: Owners of land and other natural resources received unearned income or “rent” from their holdings—often derived from conquest or inheritance. Capitalists (who often overlapped with landowners) owned physical capital (like factories or ships) and received interest or profit from investing. Workers received wages. Also recall that the classical economists favored taxing “rent” by taxing land values; Henry George crusaded for this tax.

John Bates Clark of Columbia University, for whom is named the prestigious John Bates Clark Medal, transformed economics into an inequality-free abstraction.

Writing in the 1890’s, Clark merged land into physical capital, thus obliterating the classical understanding of land. In the new neoclassical world, capital (including land) originates solely from productive investment. There is no unearned “rent”, only legitimate “profit.” (Ironically, Marx merged rent into profit because he considered both illegitimate.)

Clark reduced economics to only two “factors of production”, capital and labor. In Clark’s model, “supply and demand” in a free market ensure that capital and labor each earns its “marginal product”, that is, the contribution of the final amount supplied. This outcome is supposedly both fair and efficient. Clark writes, “the share of wealth that falls to any producing agent tends, under natural law, to equal the amount that he creates. A man’s pay tends to equal the value of the product or fraction of a product that can be specifically imputed to him.” (Clark, 1898: 4) So much for any claim that laborers are exploited!

Clark also eliminated time, —giving us the familiar time-less, space-less, context-less world of Economics 1. But without time, there can be no history, and without history, no questioning the justice of property ownership, or the legitimacy of institutions.

Neoclassical economics in the United States followed Clark, to the extent that the future Clark Medal and Swedish Bank “Nobel” prize winner Robert Solow could joke in 1955 that “…if God had meant there to be more than two factors of production, He would have made it easier for us to draw three dimensional diagrams.” (Solow, 1955: 101)

Meanwhile, over in Europe, Italian nobleman Vilfredo Pareto made two key contributions to the emerging neoclassical paradigm. First, he estimated that 80% of the land in Italy belonged to 20% of the population, from which he concluded that inequality follows a natural law: the 80:20 rule, with which we shouldn’t tamper. More famously, he developed the policy rule known as “Pareto improvement.” Pareto improvement holds that we should undertake no policy changes unless they make at least one person better off and no one worse off. Sounds fair and reasonable, doesn’t it? By that logic we should have paid the slaveholders in full after the Civil War! By that logic once having cut taxes on the rich, we cannot raise them again! The status quo rules, no matter how cruel or illogical the route that got us there.

Under the new neoclassical regime, mathematical models proliferated like kudzu vines in the south, their very complexity keeping them safely obscure. Few are more famous (among economists) than Robert Solow’s 1956 simple two-factor growth model. Assuming a world of uniform depreciating physical capital (implicitly ignoring durable natural resources like land), and uniform quality labor, Solow’s model predicts that economies will grow towards a steady state where depreciation just equals new investment. And because the richer you are the slower you grow, poorer economies and poorer people within economies will catch up. Solow’s model is cute as a button!—but its extreme abstractness lies poles apart from Smith’s original common sense model explaining growth in terms of cooperation and specialization.

Almost sixty years later, Thomas Piketty has taken Solow’s model and added his own twist. In Solow’s model, the poor catch up to the rich. In Piketty’s model, the modern decline in growth does not affect investment. Consequently, now that return to capital investment exceeds the rate of growth, then inequality must inexorably increase. This model, he says, determines the fate of the twenty-first century.

Critics have torn into Piketty’s model—including some, like James Galbraith, who still give Piketty kudos for stirring up debate. In my view, Piketty’s and Solow’s models are both fundamentally flawed in that they rest on the same ahistorical, apolitical, two-factor neoclassical foundation. As the classical economists understood, inequality derives from power, ultimately the power of conquerors to extract tribute from the conquered. And as the Progressives, the New Dealers, and the civil rights activists have demonstrated, democratic societies can counter that power with well-designed tax and regulatory policies supported by an aroused public. We are not prisoners of a mathematical model.